Last week we took a brief look at the liquidity risk management regime in Hong Kong. This week, moving slightly southwest, and staying in the same continent, we review the liquidity risk requirements in Singapore.
In 2018, the same year Hong Kong made amendments to its Fund Manager Code of Conduct, the Monetary Authority of Singapore (MAS) issued new Guidelines on Liquidity Risk Management Practices for Fund Management Companies (Guidelines). The new guidelines introduced a liquidity risk management framework with respect to the management of collective investment schemes. It included the use of liquidity management tools and stress testing, to manage the risk mismatches in the liquidity profile of the assets and the redemption terms in collective investment schemes managed by fund management companies (FMCs).
In the same year, the Code on Collective Investment Schemes (Code) was also revised.
Guidelines on Liquidity Risk Management Practices for Fund Management Companies
The key areas covered in the Guidelines include:
Governance
The guidelines provide that the liquidity risk management process must be an integral part of an FMC’s broader risk management process. Regulation 13B(1)(a) of the SF(LCB)R requires FMCs to put in place a risk management framework to identify, address and monitor the risks associated with customer assets that it manages. This includes the liquidity risks associated with the CIS managed by FMCs.
In terms of implementing a liquidity risk management framework, the guidelines provide that there should be clear responsibility and accountability in an FMC with respect to the monitoring and managing of liquidity risks associated with its CIS..
Additionally, FMCs which manage retail CIS with daily dealing are expected to have in place a dedicated and independent risk management function whose responsibility includes liquidity risk management.
Initial Design of Product
The evaluation of liquidity risk that a CIS may face throughout the product cycle and the implementation of arrangements to set the foundation for effective liquidity risk management should begin at the product design stage. During the design of the CIS, FMCs should consider whether the CIS’ dealing (subscriptions and redemptions) arrangements are aligned with investors’ expectations, as well as its investment strategy and the liquidity profile of the underlying assets.
The dealing frequency of the CIS should reflect the overall liquidity of the underlying assets held by the fund, and vice versa. The FMC should assess that the subscription and redemption policy of the CIS is realistic and appropriate, taking into consideration the profile of the underlying investors of the CIS, as well as the investment strategy and liquidity of the assets that the CIS will invest in.
Ongoing Liquidity Risk Management
Under the Guidelines, FMCs are expected to monitor and manage the liquidity risk of a CIS throughout its lifecycle. This includes ongoing monitoring of investors’ profile and redemption patterns and conducting regular assessments on the liquidity profile of the CIS’ liabilities and assets.
The assessment of the profile and liquidity needs of investors could include reviews of the investors’ historical redemption patterns and expected future liquidity demands of the CIS at different stages of its life cycle under varying market conditions.
The FMC should also regularly assess and evaluate the liquidity of the underlying assets of the CIS, individually and on a portfolio basis. In performing the assessment, FMCs could:
- Use appropriate liquidity metrics or indicators, such as the number of days and cost to liquidate assets without significant market impact and redemption coverage ratio;
- Consider other quantitative and qualitative factors, such as asset class, credit quality, asset and investment concentration and cash flow projections;
- Monitor the use of temporary borrowing to meet redemptions; and
- Consider the use of collateral arrangements and appropriate haircuts for collaterals, and monitor the liquidity of underlying securities held as collateral, especially when these holdings amount to a significant portion of the CIS’ net asset value
Stress Testing
The Guidelines also provide that an FMC should satisfy itself that the CIS can withstand liquidity stresses during extended periods of market disruptions or idiosyncratic concerns. The FMC should complement its liquidity risk management tools with regular stress testing. Liquidity stress testing of the CIS should be performed at a frequency relevant to the specific CIS. An FMC is strongly encouraged to perform more regular stress tests on CIS with daily dealing, or CIS which are more susceptible to varying market conditions, such as those which invest in thinly traded markets.
The FMC should consider using stress test scenarios based on:
- Backward-looking historical market conditions and redemption patterns of the CIS; and
- Forward-looking hypothetical scenarios
Examples of factors that FMCs should consider in its stress testing include:
- A specific redemption amount which is a percentage of the fund size (e.g. highest historical or worst case redemption rate);
- A simulation of the behaviour of different types of investors; and
- Redemption by its largest investor(s) or distributor(s).
Code on Collective Investment Schemes
As mentioned above, the Code on Collective Investment Schemes (Code) was also revised. The code now makes reference to the above guidelines and states that manager should assess and adopt the liquidity risk management practices that are set out in the Guidelines on Liquidity Risk Management Framework for Fund Management Companies, on a proportionate basis that is commensurate with its role and the scale and complexity of its operations and the schemes that it manages.
The CIS code also now requires MMFs offered to retail investors in Singapore to:
As mentioned above, the Code on Collective Investment Schemes (Code) was also revised. The code now makes reference to the above guidelines and states that manager should assess and adopt the liquidity risk management practices that are set out in the Guidelines on Liquidity Risk Management Framework for Fund Management Companies, on a proportionate basis that is commensurate with its role and the scale and complexity of its operations and the schemes that it manages.
The CIS code also now requires MMFs offered to retail investors in Singapore to:
- Maintain a dollar-weighted average portfolio maturity that does not exceed 60 calendar days for short term MMFs, and six months for other MMFs; and
- Invest at least 10% of the MMF’s net asset value in daily maturing liquid assets; and 20% of the MMF’s net asset value in weekly maturing liquid assets.
Summary
The Funds-Axis liquidity risk management module is designed to meet international requirements in respect of liquidity risk management and liquidity stress testing. This includes in respect of UCITS, AIFMD, EU MMF regulations and SEC Liquidity requirements.
Our cloud-based reporting platform provides interactive, real-time reporting of liquidity risk through a comprehensive suite of dashboards. These dashboards are built with international regulations in mind to provide our end users with a solution that covers all aspects of their liquidity risk responsibilities.
